CEO Turnover &
Director Reputation
When a board fires its CEO, is it showing strength or admitting failure?
We analyzed 88,000 director elections to find out.
The Core Finding
+1.20%
increase in withheld votes
19.6% increase relative to mean withheld votes
Effect persists for 3+ years with no reversal
88,406
Director Elections
206
Forced Turnovers
88,406
Director Elections
206
Forced Turnovers
Two Competing Views
For decades, financial economists have debated what a forced CEO turnover signals about board quality. Our research provides a definitive answer.
The Conventional View
"Effective Monitoring"
Firing a poor performer demonstrates that the board is independent and willing to make tough decisions. Shareholders should reward directors for taking corrective action.
The Failure View
"Governance Failure"
The need to fire a CEO implies the board hired the wrong person or waited too long to act. Shareholders penalize directors for letting the situation deteriorate.
How do we isolate reputation from performance?
The challenge: when a firm fails, directors look bad. But is that because they're poor monitors, or just unlucky? We use board interlocks to separate reputation from firm performance — creating a natural experiment that reveals pure reputational spillover.
The Challenge
When a firm fails and fires its CEO, directors look bad. But is that because they're bad directors, or just because they were unlucky? We need to isolate pure reputation from firm performance.
Director Smith
Serves on both boards
Firm A
Treatment Firm
Firm B
Measurement Firm
206
Forced Turnovers
88,406
Director Elections
607
Interlocked Directorships
The Penalty is Real — and Persistent
The Parallel Trends Chart
Difference in withheld votes between turnover-interlocked and control directors
A Sharp, Lasting Impact
Directors who sit on boards that fire a CEO see an immediate and sustained increase in withheld votes at their other board positions. This isn't noise — it's shareholders voting with their proxies.
1.20% increase in withheld votes
Equivalent to ~20% increase over the baseline mean
Persistent for 3+ years
No evidence of "forgive and forget"
Robust to extensive controls
Propensity score matching, firm fixed effects, and more
Worse Than a Lawsuit
How does the reputational damage from a forced CEO turnover compare to other corporate governance events? The answer is striking: firing a CEO hurts director reputation more than financial restatements or securities litigation.
Why so severe? CEO hiring and monitoring is the board's most critical function. A forced turnover signals failure at this core responsibility — more damaging to director reputation than even financial scandals.
Severity Comparison
How does firing a CEO compare to other governance failures?
Key insight: Forcing out a CEO damages director reputation more than financial restatements or lawsuits — second only to bankruptcy.
Not All Turnovers Are Punished Equally
Shareholders are sophisticated. They distinguish between boards that acted swiftly and those that waited too long. The penalty reveals what investors truly care about: proactive governance, not reactive crisis management.
When Does the Penalty Apply?
Cross-sectional analysis: Not all turnovers are punished equally
Performance-Induced Turnovers
When the CEO is fired due to poor firm performance, the penalty is severe (+1.39%). The board is held accountable for both hiring the wrong person and failing to act sooner.
Non-Performance Turnovers
Strategic CEO changes (retirement, better opportunity) carry no penalty. Shareholders recognize the difference between governance failure and normal succession.
Late-Stage Firings ("Harvest Stage")
Firing a CEO after 3+ years of tenure (+1.68%) is punished more severely than early action. The longer boards wait, the worse they look.
Explore the Factors
What drives the penalty? Adjust the circumstances of a forced turnover to see how shareholders respond differently to various governance scenarios.
predicted penalty
When was the CEO fired?
Timing relative to CEO tenure matters significantly
Was a successor ready?
Succession planning signals board preparedness
Director's Board Role
Committee membership affects accountability
Predicted Penalty
withheld votes
Based on Table 6 & 7 coefficients
The Key Insight
Shareholders don't punish directors for firing a CEO — they punish them for waiting too long to do it. Early, decisive action with proper succession planning signals competent governance and largely avoids the reputational penalty.
Why This Matters
This research challenges the dominant view that CEO firings signal effective governance. Directors are held accountable across firms, with real labor market consequences — lost board seats, exit from the director market, and diminished career prospects.
For Directors
Your reputation travels. Governance failures at one firm affect your standing at all firms where you serve.
For Boards
Proactive CEO monitoring and succession planning protect director reputation. Swift action is rewarded; delay is punished.
For Investors
Shareholder voting is an effective accountability mechanism. Directors face real consequences for governance failures.
About the Authors
This research was conducted by a team of scholars from the University of St.Gallen and affiliated institutions, bringing together expertise in corporate governance, behavioral finance, and empirical research methods.
Felix von Meyerinck
Director of Research
Lake Lucerne Institute
Financial economist serving as Director of Research at the Lake Lucerne Institute. Senior Research Associate at University of Zurich and Fellow at Hamburg Financial Research Center.
Jonas Romer
Researcher & Entrepreneur
University of St.Gallen
Ph.D. in Finance from University of St.Gallen. Researcher applying machine learning to corporate governance and ESG. Co-Founder, CMO & CTO of ofinto, Switzerland's leading D2C ergonomic furniture brand.
Markus Schmid
Professor of Finance
University of St.Gallen
Professor of Finance and Chair for Corporate Finance at University of St.Gallen. Vice Dean of School of Finance, Managing Director of Swiss Institute of Banking and Finance, Faculty Member of Swiss Finance Institute.
Cite This Paper
https://doi.org/10.1016/j.jfineco.2024.103971